Prior to Future Proof wrapping up, Evan Harp got the chance to sit down with Direxion’s managing director and head of products David Mazza to discuss their new single stock ETFs.
Evan Harp: Can you give everyone a broad overview of the single stock products and their use case?
David Mazza: Sure, single stock leverage, and inverse ETFs are intended to be trading tools that allow traders to express bullish and bearish views on individual securities. In particular, the ones offered by direction are 1.5x the daily return of an individual stock on the bull side. And then 1x, so just the inverse of the return, on the bear side.
We offer these for, at present, five securities. And that’s Amazon, Alphabet, Apple, Tesla, and Microsoft. There are a few different use cases. So, leveraging inverse ETFs have existed for decades, and single stock, leveraged ETFs, have existed in Europe for quite a long time as well.
In today’s market, the way I think about the world is that you have to lengthen your horizon from an investment standpoint – because there’s so much volatility, it’s difficult to stomach that. So that’s when you’re using low-cost ETFs. Great way to set it and forget it; if that’s your objective or, and this is not mutually exclusive, you need to shorten your horizon to take advantage of the volatility.
What we were hearing from our client base, the traders who use Direxion products, is there’s so much volatility at the individual security level. Wouldn’t it be great to have a tool to either express that positive viewpoint if I believe Tesla’s going to go to be up over a short time period or – interestingly enough, if I’m still bullish on Apple or Tesla, I may have long-term holdings, embedded capital gains, but I’m concerned that, let’s say, last week’s iPhone 14 announcement was going to go poorly, or Tesla’s delivery vehicles are going to go poorly. I can use this ETF, the inverse ETF, to hedge that exposure on a short-term basis.
The emphasis here is that they’re intended to be tools to take advantage of volatility, but you have to, if you’re going to use these products, you really have to have the ability to monitor the positions on a daily basis. You have to make a buy, sell, or hold decision every day, because we’re delivering the daily return.
Evan Harp: I am curious about how you set your leverage points. I’ve seen some funds that will do 1.25x for Tesla or 2x for Pfizer, for whatever reason. What’s the method that Direxion uses to come up with its setting?
David Mazza: Leveraged and inverse ETFs must comply, like any ETFs, with certain regulations. We’re cutting through some of the complicated math to get there; it goes back to the volatility of an individual security or an index to weigh to get to a particular leverage point; as you’d imagine, an individual security is more volatile than a basket of securities, so you have to take that into consideration.
That said, at Direxion, we believe that it’s easier to understand and better for traders to have a consistent leverage point. So, we have all our bull funds offered at 1.5x, and our bear funds are at the inverse, 1×. Just the inverse of that daily return. We intend to have consistency at the leverage point.
Evan Harp: That makes a ton of sense. Now that these products will become more available, is there a chance for product confusion, given all the similar-looking tickers?
David Mazza: I think that’s fair. Look, as of yesterday, there are now 3,000 ETFs active in the US market, which is an incredible milestone, and that’s all ETFs. At the single stock level, certainly, we could see additional providers, either existing ETF providers or new entrants, moving to the space and offering this. But what I would say is that for folks that are interested, for those who have the aptitude and interest in trading them – because again, these are trading tools – perhaps look to a provider who has a history of managing these funds and a history of educating traders on how to use them, which is why at Direxion, we spend so much considerable time trying to educate, having a dedicated resources, whether those are articles or videos are other ways to learn about the products, learn about their utility, learn about their use case.
So yes, there is potential for confusion. However, again, what we intend to do is have consistent leverage points and what I’d say is a consistent narrative of how to best use these products in a way that may be in some ways remarkably similar towards our traditional leveraging diversity. Of course, those are untraditional by nature, or where you were where you potentially should think about them slightly differently because of their volatility.
Evan Harp: I have one more question for you, then I’ll let you enjoy that California sun – what is the thing about these kinds of products that you see most advisors or investors getting wrong?
David Mazza: I spent most of my career at State Street Global Advisors, and I love, I love, I love what I learned there. I love that firm. There, much of the narrative is around efficient market hypotheses building portfolios for the long term.
I think there is an inconsistency about leveraging diverse products in general, that you can only own them for 30 seconds or an hour. I say that facetiously, but I also want to clarify that you should not own them over the long run – but you can own them for more than a day. Again, if you can make that buy, sell, or hold decision. Because there could be times when compounding can benefit you. But there are plenty of times when it does not.
I think the greatest misperception about leverage, to begin with, is that it’s all bad, and it doesn’t work. It can’t work for you. If you are a trader, they give you very powerful tools, particularly compared to things that are less transparent and more expensive, like options or other derivatives.
This is where the ETF structure has shown its resiliency across a multitude of asset classes, whether it’s stocks, bonds, gold, you name it, is in the ETF wrapper – and here we’re taking the benefit of the structure and applying it at the individual security level, both for amplified upside and to have a short term hedge in the case of our inverse products.
For more news, information, and strategy, visit the Leveraged & Inverse Channel.